Falling Interest RatesThe Canadian dollar has not exactly been having a good year against its American counterpart. From the start of 2024 through to October 9, the Canadian dollar lost 3.36% of its value compared to the U.S. dollar. The Canadian dollar, which is trading at 1.371 per U.S. dollar, or $0.7293 U.S. cents, has weakened by more than two cents over the last two weeks.

There are two main reasons for the weak performance. First, the U.S. economy is doing much better than the Canadian economy. In September, the U.S. economy added a whopping 254,000 jobs. This is well above economists’ expectations for 140,000 job gains. The unemployment rate also ticked down to 4.1%.

The strong economic data and recent 50 basis-point interest rate cut suggest the U.S. will avoid the long-promised recession. This will be even more evident should gross domestic product (GDP) growth remain solid and consumers continue to spend.

Contrast that with the Canadian economy which rose just 0.2% in July with early estimates suggesting August data was flat. Canada’s unemployment rate, which is at 6.6%, has been rising for the last 17 months and the economy added just 22,000 jobs in August.

Where the Federal Reserve will most likely announce a smaller interest rate cut or even pause when it meets next, chances are the Bank of Canada could announce a larger interest rate cut to help avoid a recession.

The Canadian dollar is also showing weakness of late due to falling oil prices. The price of oil jumped almost 14% in the opening days of October on growing tensions between Israel and Iran. But over the last number of days, the price of oil has trended lower, dragging the value of the loonie down along with it. Canada is a major producer of commodities like oil, so as a result, a shift in commodity prices will have a big impact on the Canadian dollar. 

Where Will the Canadian Dollar Be in a Year?

Despite the loonie’s poor performance in 2024, the outlook for the Canadian dollar in 2025 is a little more robust. Due to Canada’s weak economic performance, the Bank of Canada is expected to announce a number of big interest rate cuts over the coming quarters. Lower interest rates make it cheaper to borrow which should help juice Canada’s economy.

Canada’s economy is also more sensitive to interest rate cuts than the U.S. economy is. The mortgage cycle in Canada is very short compared to the U.S. In Canada, mortgages are generally renewed every five years, in the U.S. mortgages and amortization lengths are the same. A 25-year mortgage in Canada translates into 5 renewals, in the U.S., payments are locked in for 25 years.

Meanwhile, Canada’s household debt is the highest in the G7. As a share of net disposable income, household debt stands at 175%. That means that for every dollar of disposable income, Canadians owed $1.75. In the U.S. and Germany, the debt-to-income level is 100%.

As a result, additional interest rate cuts in 2025 should help boost the Canadian economy and attract investor appetite for risk.

What does this mean for the loonie in 2025? Since hitting an almost two-year low in August of 1.3946 per U.S. dollar, the loonie has advanced, as noted above, to 1.371 per U.S. dollar. According to a poll by Reuters, the median forecast of 40 foreign exchange analysts suggested the gains made by the loonie will consolidate in the next three months to 1,3514 and advance to 1,3275 in a year.

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